A common digital tax can check unfair globalisation

The global debate on innovation and regulation is about to take a new turn with a Turkish plan for an all-encompassing digital tax. The tax, which is expected to be approved by parliament this week, will apply not only to electronic marketplaces such as eBay and digital advertising giants such as Google and Facebook, but also to e-commerce platforms involved in the sale of digital goods and services, such as Spotify and Netflix.

This goes beyond the scope of the French digital tax which came into force a few months ago and the abortive European Union proposal of last year.

Turkey’s proposed tax has rekindled the debate on the fairness of globalisation and the role of international governance. The severity of the regulatory framework being contemplated is in many ways a byproduct of the failure of multilateralism and its inability to redress the grievances of nations that perceive the system as being rigged against their economic interest.

National governments have long grappled with the need to tax digital behemoths. Authorities in Europe and in the emerging world are seeking a formula that would give them tax revenues that reflect the share of business conducted by these global companies on their territory.

They have tried direct negotiations with companies, with mixed results. In the absence of common taxation rules applicable in all relevant jurisdictions for cross-border digital transactions, there have been several non-replicable, non-transparent individual deals between governments and companies. The companies have failed to achieve their aim of policy and tax predictability, governments have struggled to get the buy-in of companies for easily transposable settlements.

You would think the disparate approach to taxing internet-enabled business models and its impact on the distributional benefits of globalisation would provide an ideal opportunity for multilateral governance to demonstrate its effectiveness. The G20, in its summit declaration at Buenos Aires, has acknowledged the importance of a global deal on digital taxation. The Organisation for Economic Cooperation and Development has advanced an agenda for a set of common rules.

But multilateralism has so far failed to produce the consensus needed to address ongoing divisions – whether between companies and governments, or between nations such as the US and China, that have nurtured large digital companies, and the rest of the world,

The failure of the multilateral track has now provided an opening for non-consensual and protectionist digital policies to emerge. What can be witnessed in this area is a race to the bottom. Following the example set by France, Turkey is seeking to tax digital companies at 7.5 per cent, more than double the French rate. What is more, the tax is to apply regardless of whether the companies are profitable or not.

It is not clear whether the proposed measures comply with Turkey’s international obligations under the World Trade Organisation, or under its bilateral tax treaties. Even if they are, there are concerns that a digital tax would serve as a disincentive for foreign investment in a booming industry where Turkey had succeeded in creating a dynamic ecosystem. Turkey is home to highly successful mobile-gaming creators, as well as Turkish-language Android and IOS apps.

Even so, there is a good chance the Turkish example will be followed by governments in other emerging nations that believe that the industrialised world – and by extension, the multilateral system – has for too long been unresponsive to their anxieties about the consequences of unfair globalisation. A fragmentation of global regulations affecting the digital economy is afoot.

The multilateral institutions may have one last chance to stop the trend. The OECD is holding a stakeholders meeting this week to gather views on its proposed approach to taxing the digital economy. The plan is for a set of proposals to be formally adopted by the G-20 at its meeting in Riyadh next year. But any agreement will be conditional on the Trump administration demonstrating flexibility toward the expectations of the other OECD nations.

The hope is that the US will ultimately see that a set of common tax rules, even if it would impact the few American digital giants, would still be a better outcome for the global economy than a grab-bag of divergent approaches to regulating and taxing digital entrepreneurship.

The failure of the multilateral track has provided an opening for protectionist digital policies to emerge in different countries